There are plenty of reasons put-forward for why oil prices more than halved over the past year. But no one’s talking about a bubble that bust; seems like the world is wallowing in denial. Likely because if indeed it was a bubble (that just bust), it’s going to be a LONG TIME before anyone sees $100 again, and just about everybody has exposure to that scenario.

”I Blame it on the Saudi’s...BOMB THEM” says Donald Trump, well actually he didn’t say that; but that’s the sort of stupid remark you’d expect from a Republican Party Presidential front-runner.

On a Google Search I found ONE reference to the idea it might have been a bubble (that bust). In January David Rosenburg wrote...“with perfect hindsight, oil was in a classic bubble”.

Bubbles do happen, they really do. But like sex in Victorian times, no one wants to talk about it.

I suspect, even today...with the benefit of hindsight, Ben Bernanke might reluctantly concede that it is not totally inconceivable that what happened to house prices in U.S.A. between 2004 and 2007 could...perhaps (and of course perhaps not)...have been a bubble. But perhaps he would chose to not mention the “B-Word” in polite company; certainly he’s never come out and said that explicitly, so I’m speculating.

A bubble is when price gets distorted up above what is sustainable for end-users. In the case of houses people who live in houses are the end-users. As opposed to flippers or buyers of AAA Residential Mortgage Backed Securities, who in the end, after the (alleged) bubble in house prices, bust, became proud owners of millions of house they didn’t want to live in. In the case of oil, it’s the people who use it to create value, for themselves, or value they can sell on; that are the end users.

A common cause of bubbles is when protection is sold.

The root cause of the housing bubble was AIG selling Collateral Debt Obligations (CDO’s), for pennies. Strip away the complications of the food-chain, those guaranteed that house prices would not go down (or if they did AIG would pay the difference). In other words, they arbitrarily set a price for the future. So why would anyone sell a house for less than what AIG guaranteed it would be worth in the future? Instead of selling the house for less, all you had to do was to wait for the future and AIG would buy it from you, unless in the mean-time you got a matching or better offer from someone who actually fancied living in the house.

Disclosure: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary ...
more

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.

Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.

Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics.